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Hedging versus not hedging: strategies for managing foreign exchange transaction exposure, Discussion Paper No 162

McCarthy, Scott D. (2003) Hedging versus not hedging: strategies for managing foreign exchange transaction exposure, Discussion Paper No 162. . [Working Paper]

Abstract

This paper compares a number of strategies for managing foreign exchange exposures. The strategies are never hedging, hedging every exposure using a forward exchange contract, and hedging on selective occasions using a forward exchange contract. With regard to the selective hedging, the decision as to whether to hedge or not depends on the future spot exchange rate as determined by a number of forecasting techniques. The techniques include the random walk, the large premia model and a volatility model. The paper considers the USD vis a vis the AUD, SGD and JPY. The results are mixed and show that for the period 1992 to 2003 the Australian exporter is better off always hedging while the Singapore and Japanese exporters are better off never hedging. The various management strategies are compared using Sharpe’s model and the minimum variance model though it seems the results are not sensitive to use of either.

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ID Code: 315
Item Type: Working Paper
Additional Information: All correspondence to: Associate Professor Andrew Worthington Editor, Discussion Papers in Economic, Finance and International Competitiveness School of Economics and Finance, Queensland University of Technology GPO Box 2434, BRISBANE QLD 4001, Australia Email: a.worthington@qut.edu.au
Keywords: Selective foreign exchange currency hedging, random walk, large premia model, volatility model
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > Financial Economics (140207)
Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200) > International Economics and International Finance (140210)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2003 (Please consult author)
Deposited On: 23 Jul 2004
Last Modified: 05 Jan 2011 23:23

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